Your NYTimes op-ed today, "The
Republican Riverboat Gamble," displays an astonishing level of ignorance about
the simplest tenets of supply-side economics. If this were 1975 or even 1980,1
could excuse such ignorance in an eminent Princeton Ph.D. economist who has
recently served as vice chairman of the Federal Reserve and a member of
President Clinton's Council of Economic Advisers. But Alan, this is 1996! It's
21 years after I coined the phrase "supply-side economics," and probably 25
years since Professors Bob Mundell and Art Laffer began putting it together at
the University of Chicago. How could you have gone all this time without
inquiring into the nature of the basic analytical framework we have been
using? It is clear from your essay that practically everything you know about
supply-side economics was learned by reading the newspapers. If you had taken
the slightest trouble in asking those of us who developed the system, you
would have discovered that we do not equate tax cuts with an increase in
the savings rate!! I say that again: When tax cuts are called for in
a supply model, there is absolutely no consideration given to increasing the
savings rate!! The savings rate is a concept that is only appropriate in
the static demand-side model you were taught. It is the chief reason why you
and your Keynesian colleagues cannot now even imagine an economy that can grow
at high rates without inflation — because an increase in the savings rate
requires a decrease in the rate of consumption. Your basic problem is that you
study the economy exclusively through the national income accounts, which
exclude an analysis of existing wealth on human behavior. Don't you
realize that as the recorded savings rate of income was falling from
1982 to 1986, the value of previous savings, i.e., national wealth, was rising
dramatically. The value of publicly traded stock, which is merely the tip of
the iceberg of national wealth, tripled in that period. Why should you or I
save more of our income when the value of our wealth is exploding?

If you once had taken the trouble of raising these
questions with me over the past 20 years, we could have sorted this out, and
you would not now be writing such silly pieces in the Times. Do you
recall that when you were appointed to the Fed, I told the press it was a good
move by the President because, although we disagreed, you were intellectually
honest? In your years at the Fed, I will remind you that I called for an
appointment at least a dozen times, and never was your door opened to me. Once
you know what you know, you obviously do not need to know any more. Your
intellectual honesty comes through in the op-ed, when you allow that the
recession of 1981-82 was caused by the Fed's tight-money policy. Some of your
colleagues will not even allow that much. Your intellectual ignorance comes
through in your assertion that the 15% interest rates following the Reagan tax
cuts of 1981 were caused by the market's fear of ballooning budget deficits.
At least Jim Tobin at Yale understood that you cannot be fueling demand for
money with tax cuts and starving liquidity by a Fed policy that sent the gold
price plunging from $625 in late 1980 to below $300 in early 1982 without
causing stratospheric interest rates. If you were too embarrassed to ask me or
any other supply-sider what was going on, you could have called Paul Volcker
and he would have given you a heads up.

You still
have a few years left to your tenure at Yale. I would suggest you throw out
the comic books from which you teach your students the elements of supply-side
economics and for starters read The Way the World Works
, which I wrote in 1977 and was
published in 1978. You should not be afraid to learn something new. If you had
taken the trouble to go to the sources on supply-side before you advised
President Clinton, he could have been a much better President. As it is, he
still believes that the economy is growing as fast as it can. If he loses in
November, it will be because he has not one single economist around him at the
White House or in Treasury who knows as much about economic growth as any of a
dozen people who routinely report to Kemp.